12/13/12 Death Spiral States

They’ve been called business unfriendly.  Financial hellholes.  Death spiral states.  Without drastic action, they’re the first states that will likely collapse.

By one measure, a death spiral state is one in which there are more takers than makers.  “A taker is someone who draws money from the government, as an employee, pensioner or welfare recipient.”   [“Taker” definition from Forbes magazine].  A maker is someone who works in the private sector.

Figured into the taker category is the number of Medicaid recipients.  And the amount of the state’s unfunded pension liabilities.  [Another consideration is a state’s credit worthiness according to analysis by Conning & Co.] A taker-to-maker ratio greater than 1.0 is bad news.  Created by Forbes magazine, this formula yields 11 death spiral states.

[Death Spiral States

New Mexico       1.53
Mississippi         1.49
California            1.39
Alabama              1.10
Maine                   1.07
New York             1.07
South Carolina    1.06
Kentucky              1.05
Illinois                  1.03
Hawaii                  1.02
Ohio                      1.00]

Then, there’s the U-Haul Index.  It’s the wide disparity in the cost for a one-way U-Haul rental between two cities.  It costs nearly twice as much for a rental from San Francisco to San Antonio [$1,693] than to go the other way [San Antonio to San Francisco $983].  It’s supply and demand.  People are fleeing California for business and consumer friendly Texas.

In the 1980s and 90s it was business and the middle class who fled cities – leaving a dwindling number of makers who are paying for the takers.  The likely collapse of Detroit is a prime example.

Now, it’s not just cities that will decay but entire states.  Middle class, businesses and other job creators are fleeing to better states.